Income Tax Rebate Under Section 156 – A Complete Guide for FY 2025-26

Understanding how the tax system works can help you make better financial decisions. The income tax rebate under Section 156 of the Income Tax Act, 2025 (formerly Section 87A of the Income Tax Act, 1961) is one of the most accessible tax benefits available to resident individuals in India. It directly reduces the amount of tax you owe, rather than simply lowering your taxable income. Whether you are a salaried employee, a self-employed professional or a pensioner, knowing how this rebate works can help you plan your finances more effectively.

What is the Tax Rebate Under Section 156?

The rebate under Section 156 of the Income Tax Act, 2025, is a direct reduction in the final tax payable by an eligible individual. It is not a deduction that lowers your taxable income. Instead, it reduces the actual tax liability calculated on your total income.

This provision was introduced to provide financial relief to individuals in the low- and middle-income brackets. It applies under both the old and new tax regimes, though the thresholds and maximum amounts differ significantly between the two.

The rebate is applied before adding the 4% Health and Education Cess. This means the cess is calculated on the tax amount after the rebate has been deducted.

Rebate vs Deduction – Understanding the Difference

Many taxpayers confuse a rebate with a deduction. A deduction, such as those available under Clause 123 (previously known as Section 80C) or Clause 126 (previously known as Section 80D), reduces your gross total income before tax is calculated. A rebate, on the other hand, is applied after your tax liability has already been computed.

For example, if your tax liability works out to ₹60,000 and you are eligible for the full rebate under the new tax regime for FY 2025-26, your final tax payable becomes zero. The rebate wipes out the liability entirely, subject to the applicable income limits.

Who is Eligible to Claim the Rebate Under Section 156?

Not every taxpayer can claim this rebate. The eligibility conditions are clearly defined under the Income Tax Act, 2025 and must be met in full.

The following conditions apply for FY 2025-26:

• The taxpayer must be a resident individual as per the Income Tax Act, 2025. Non-Resident Indians (NRIs) are not eligible.
• Hindu Undivided Families (HUFs), firms, companies and other entities cannot claim this rebate.
• Under the old tax regime, the total taxable income must not exceed ₹5 lakhs after all applicable deductions.
• Under the new tax regime, the total taxable income must not exceed ₹12 lakhs for FY 2025-26.
• Senior citizens aged 60 to 79 are eligible, provided they meet the income threshold.
• Super senior citizens aged 80 years and above are not eligible for this rebate.
• Salaried employees, self-employed individuals and pensioners can all claim it, as long as they qualify as residents.

It is important to note that the income limit refers to total taxable income after deductions, not gross income. For instance, under the old regime, a person with a gross income of ₹6.5 lakhs who claims ₹1.5 lakhs under Clause 123 (previously known as Section 80C) would have a taxable income of ₹5 lakhs and would qualify for the rebate.

How Much Is the Tax Rebate Allowed Under Section 156?

The maximum rebate amount has been revised over the years, particularly with the introduction and expansion of the new tax regime. The table below captures the key changes:

The rebate is always the lower of the maximum limit or the actual tax payable before cess. If your tax liability is ₹40,000 and the maximum rebate is ₹60,000, only ₹40,000 will be applied as the rebate, bringing your tax to zero.

Tax slab rates under the new regime for FY 2025-26

To understand how the rebate interacts with your tax liability, it helps to know the applicable slab rates under the new tax regime for FY 2025-26:

Under these slabs, a person with a taxable income of exactly ₹12 lakhs would have a tax liability of ₹60,000 before cess. The rebate under Section 156 for FY 2025-26 covers this entirely, resulting in zero tax payable.

Rebate Under Section 156 in the Old vs New Tax Regime

The two tax regimes offer different structures and the rebate under Section 156 works differently in each. Here is a side-by-side comparison to help you understand which regime may be more beneficial:

The Section 156 rebate in the new tax regime is more generous, particularly for FY 2025-26. However, the right choice between regimes depends on your individual financial profile. Taxpayers with substantial investments under Clause 123 (previously known as Section 80C), HomeLoan interest deductions or HRA benefits may still find the old regime advantageous even with the lower rebate ceiling.

Note: Under the Income Tax Act, 2025, taxpayers are enrolled in the new tax regime by default. To avail the rebate under the old tax regime, you must explicitly opt for the old tax regime at the time of filing your Income Tax Return (ITR). If you do not opt out, the new tax regime will apply automatically.

Also Read: Is ITR Required for Home Loan

Understanding Marginal Relief Under Section 156

When the income of a taxpayer slightly exceeds the rebate threshold, the full rebate is no longer available. However, a concept called marginal relief ensures that the additional tax burden does not exceed the amount by which income surpasses the limit.

This is particularly relevant under the new tax regime for FY 2025-26, where the threshold is ₹12 lakhs.

How marginal relief is calculated

Marginal relief is calculated using the following approach:

1. Calculate the amount by which total income exceeds ₹12 lakhs. Call this amount A.
2. Calculate the total tax payable on the actual income before cess. Call this amount B.
3. If B is greater than A, the rebate under Section 156 is (B minus A). This ensures the net tax payable equals A, not B.

This means you are never penalised for earning just a little bit more: if your income goes slightly over the ₹12 lakhs limit, the tax you pay will never be higher than the extra money you actually earned.

Suppose a taxpayer has a total income of ₹12,15,000 for FY 2025-26 under the new tax regime.

This ensures that taxpayers whose income marginally exceeds the threshold are not disproportionately penalised.

Incomes on Which the Section 156 Rebate Does Not Apply

The tax relief under Section 156 is not universal. It cannot be applied against all types of tax liabilities. Understanding these exclusions is important to avoid errors in your ITR filing.

The rebate is not applicable to:

• Long-term capital gains from equity shares and equity-oriented mutual funds taxed under Section 112A of the Income Tax Act, 2025.
• Income taxed at special rates, such as winnings from lotteries, card games or other games of chance.
• Dividend income that attracts tax at special rates beyond the prescribed threshold.

The rebate can be applied against:

• Regular income taxed at slab rates, including salary, pension and professional income.
• Short-term capital gains on assets other than those covered under Section 111A.
• Long-term capital gains taxed under Section 112 (excluding Section 112A).

This distinction is important for investors who have capital gains income alongside their regular income. Even if total income is within the eligible limit, the rebate cannot offset the tax on Section 112A gains.

How to Claim the Income Tax Rebate Under Section 156

Claiming the rebate is a straightforward process when filing your Income Tax Return (ITR) online through the income tax e-filing portal. The system calculates and applies the rebate automatically if you are eligible.

Here is a step-by-step overview:

1. Compute your total gross income from all sources for the financial year.
2. Subtract all eligible deductions under the chosen tax regime (for example, Clause 123 (previously known as Section 80C), Clause 126 (previously known as Section 80D) or standard deduction).
3. Arrive at your total taxable income.
4. Verify that your taxable income falls within the applicable threshold (₹5 lakhs for the old regime or ₹12 lakhs for the new regime for FY 2025-26).
5. Declare your income and deductions accurately in the ITR form.
6. The e-filing portal will automatically apply the Section 156 rebate if you qualify.
7. Review the tax computation summary before final submission.
8. Submit and e-verify your return.

No separate application or form is required to claim this rebate. The portal handles the calculation based on the income and deductions you declare.

Important points to keep in mind while filing

Accuracy in reporting income is important. Any discrepancy between your declared income and the data available with the Income Tax Department (such as Form 26AS or AIS) can lead to notices or processing delays.

Ensure that all deductions claimed are supported by valid documentation. For instance, Clause 123 (previously known as Section 80C) claims should be backed by investment proofs and Clause 126 (previously known as Section 80D) claims should be supported by premium payment receipts.

Filing your ITR before the due date also ensures that you can revise the return if any errors are discovered later.

Section 156 Rebate and Its Relevance to Your Financial Planning

Tax planning is an integral part of managing personal finances. The rebate under Section 156 can meaningfully reduce your tax outgo, freeing up funds that can be directed towards other financial goals.

For salaried individuals, the combination of the standard deduction of ₹75,000 and the Section 156 rebate under the new regime means that those earning up to ₹12.75 lakhs in gross salary may have zero tax liability for FY 2025-26. This benefit makes the new regime attractive to a large segment of the working population.

For self-employed professionals and small business owners, the choice between regimes requires a more detailed assessment. Those with Home Loan interest deductions or other eligible deductions may benefit from the old regime despite its lower rebate ceiling.

If you are planning a major financial commitment, such as purchasing a home, understanding your tax liability helps you accurately assess your repayment capacity. You can use a Home Loan EMI Calculator to estimate your monthly outflows and plan accordingly.

How Reduced Tax Liability Strengthens Your Loan Application

Lending institutions assess your net income and repayment capacity when evaluating a loan application. A lower tax liability effectively increases your take-home income, which can positively influence your loan eligibility. This is particularly relevant for those applying for a Home Loan. Godrej Housing Finance offers a reliable Home Loan with flexible EMIs and faster approvals.

Also Read: Home Loan: All You Need to Know

Historical Evolution of the Section 156 Rebate

The rebate limit under Section 156 has been revised multiple times since its introduction as Section 87A of the Income Tax Act, 1961. The table below provides a historical overview:

The consistent upward revision reflects the intent to reduce the tax burden on individuals in the lower- and middle-income segments and to make the new tax regime more appealing.

Final Thoughts

The income tax rebate under Section 156 of the Income Tax Act, 2025, is one of the most impactful provisions available to individual taxpayers in India. For FY 2025-26, the expansion of the rebate limit to ₹12 lakhs under the new tax regime means that many salaried and self-employed individuals can effectively bring their tax liability to zero.

Understanding the eligibility conditions, the applicable income thresholds and the types of income excluded from the rebate helps you file your returns accurately and make the most of this provision. Combining this rebate with the right deductions and a well-chosen tax regime can improve your financial position.

Whether you are planning to buy a home or simply manage your monthly budget more effectively, a clear picture of your tax liability is the starting point for sound financial planning.

Apply now for a Home Loan.

FAQs

Q.1. Can NRIs claim the rebate under Section 156?

A. No, the rebate under Section 156 of the Income Tax Act, 2025, is available only to resident individuals as defined under the Act. Non-Resident Indians do not qualify for this benefit regardless of their income level.

Q.2. Is the Section 156 rebate available to senior citizens?

A. Yes, senior citizens aged 60 to 79 can claim the rebate if their total taxable income falls within the prescribed limit. Super senior citizens aged 80 and above are not eligible.

Q.3. Does the rebate apply to income from capital gains?

A. The rebate can be applied against tax on certain capital gains. However, it cannot be used to offset tax on long-term capital gains from equity shares and equity-oriented mutual funds taxed under Section 112A of the Income Tax Act, 2025.

Q.4. What is the difference between the Section 156 rebate and a tax deduction?

A. A deduction reduces your taxable income before tax is calculated. A rebate is applied after your tax liability is computed. The Section 156 rebate directly reduces the final tax payable, not the income on which tax is assessed.

Q.5. Is the Section 156 rebate automatically applied when filing an ITR?

A. Yes, the income tax e-filing portal automatically calculates and applies the rebate if your taxable income is within the eligible limit. You do not need to make a separate claim or fill any additional form. However, if you wish to claim the rebate under the old tax regime, you must explicitly opt for it at the time of filing, as the new tax regime is the default under the Income Tax Act, 2025.

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